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Market commentary: April 2013

By April 2, 2013No Comments

SUMMARY. The European authorities have taken their level of incompetence to new levels over the last fortnight. Cyprus is not unique, and savers in UK banks should be wary.

P.S. If you haven’t been in touch regarding your ISA yet, could you do so urgently. Thanks.

The EU politicians and eurocrats are a determined bunch, including some huge intellects, and should not be underestimated.  Yet the events of the last 2 weeks have taken their level of incompetence to a new level. 

The original decision to steal, sorry, apply a levy to all Cypriot deposit holders was perfectly legal.  The subsequent decision to exclude small savers was purely political – but the damage has been done.  Depositors throughout the eurozone are now exposed, and they (increasingly) get it.

For example, one client was in Spain after the first Cyprus announcement. She quickly observed queues forming at ATMs, with many closed or limiting withdrawals. This is a glimpse of the (very near?) future.

Bank runs are not a construct of economists. Recall the Northern Rock queues in 2007. They are real and ugly, and when they occur either banks go bust (and depositors lose money) or Governments provide guarantees at some level.  In the case of the eurozone it is clear that the 100,000 euro guarantee is a fiction, and whether it is applied is at the discretion of the Germans.  And God help you if your deposit is larger.

Now the Cypriot authorities, prodded along by the EU authorities, have also introduced capital controls.  This can only increase fear throughout the eurozone, and a real threat of wider bank runs.

Yet the branches of those same Cypriot banks remained open throughout in London and Moscow! And, Reuters reports, there have been no limits on withdrawals. Bonkers?  Louis Gave (French analyst) cites this as evidence that EU policymakers are not evil, rather they are simply ignorant of how financial markets work.

Among others, the Luxembourg Prime Minister, Jean-Claude Juncker, has been at pains to point out that Cyprus is unique. But this is the same man who said “When it becomes serious you have to lie”.

Key features are shared by too many eurozone countries:  deep recession, unsustainable debts, flakey banking system, voter disquiet.

Is France OK?  The French work the least hours of any developed country; labour costs are horribly uncompetitive; profits of French companies are 60% of the European average.  BNP-Paribas has 31x leverage – the same as Lehman Brothers when it went bust.  Germany OK? Deutsche Bank has leverage of 60x.

UK savers would do well to remember that when you deposit money with a bank you lend it to them, it becomes their asset to do with what they will (to a very large extent).  It is no longer your money, you are simply owed the money by your bank, and they may or may not be able to repay it at the time you want it back.

Dennehy Wealth